Reference no: EM132680832

A corporation wishes to establish a new product line that is expected to increase revenue over the next several years. The asset investment needed is $300,000, to be financed with 60% equity and 40% loan money. The equity earnings rate (what the shareholders expect) is 22% per year. The loan interest rate is 12%, with annual principal payments of $30,000 per year. Depreciation is straight line (no half-year convention) over a period of 6 years, with zero expected salvage value. It is expected that revenues from this product line will be $380,000 per year. Expenses for labor and materials associated with the product line will be $60,000 per year.

The marginal tax rate is 40% (combined federal and state).

Problem 1: Determine these three values for operations in year 1:

Net equity flow, the return on equity, the return of equity.